Sarkozy – Capital’s latest helper

(June 2007)

The three main contenders for France’s presidency last month were in agreement over one thing – the need for economic reform and increased accommodation for market forces

But why are Europe’s capitalists so desperate to embrace Nicolas Sarkozy’s new vision of France?

The French presidential elections last month tell us something important about the condition of capitalism today. Virtually all mainstream commentators and politicians lined up to insist that France has to suffer a dose of “reform” – “neoliberal” measures such as increased working hours, cutbacks in social provision, “market testing” of jobs, privatisation and the slashing of employment rights.

From their tone, you would think the French economy was one of the weakest in the world, or at least in Europe.

Yet the economic figures indicate something rather different. Output per hour by French workers, for example, is nearly 20 percent higher than in Britain and even about 5 percent higher than in the US. Compared to Britain, France’s exports are higher, with a trade deficit running at about a third.

The one thing that seems much worse in France is the unemployment rate – about 9 percent against 5.4 percent in Britain. But the British figure seems lower than it actually is due to around 7 percent of the workforce being on invalidity benefits compared to just 0.3 percent in France. The number of people out of work is actually not particularly different.

The word “neoliberalism” does not in itself explain why capitalism feels it needs such measures today more than it did 30 or 40 years ago. It is easy to fall into the trap of seeing a solution in attempting to persuade capitalists to change their mindset.

Even David Harvey, author of several penetrating books about imperialism and neoliberalism, suggests that the alternative to neoliberalism is a return to “the Keynesian compromise and embedded liberalism constructed after 1945”.

However, neoliberalism is only a symptom of a more deep seated change in how the capitalist system functions.

Capitalism grew more smoothly and rapidly than ever before in its history for the first three decades after the Second World War. But since the 1970s an old problem, analysed by Karl Marx 140 years ago, has returned to haunt it.

Competition between capitalists caused investment to grow more rapidly than the number of workers. Since it was the labour of these workers that produced profits, eventually the ratio of profits to investment – the rate of profit – fell throughout the system.

The result was a slowing of growth and a succession of economic crises in 1974, 1980, 1990, 1997 and 2001.

There was an old established mechanism within capitalism which would once have dealt with such difficulties. Some big firms would have driven others out of business in the crises and rebuilt their own profits at the expense of these others. Capitalism would have started prospering again through what some of its apologists call “creative destruction”.

But by the 1970s the important capitalist firms were so big that simply allowing some to destroy others would have caused immense devastation to the survivors. As a result, governments took steps to prevent the big capitalists from going bust. There was large-scale destruction of jobs, but few very big bankruptcies. So the conditions that had created crisis never went away for long.

This meant a low rate of investment in productive industry, continuing low average rates of growth and rising levels of unemployment.

It meant something else as well. Capitalists who saw manufacturing as not particularly profitable poured investment instead into selling products, advertising, financial gambling or the cheap purchase of privatised industries.

These could make the capitalists who owned them rich and also make it seem that particular countries were suddenly growing very rapidly. Yet the long-term effect was further slowdown in productive investment and long-term economic growth.

This created other problems. State funds had to be diverted to contain unrest from the unemployed and their friends and relatives with jobs. Ever larger salaries were paid to managerial ranks to ensure they kept control of those below them. These were all to further drain productive investment and economic growth.

This has become a special problem for firms based in Europe. They feel threatened by competition from US-based firms which have succeeded in cutting workers’ real wages and pushing up working hours.

They also face growing competition in international markets from the upsurge of Chinese capitalism.

There is only one answer to this within capitalism – a reduction to a minimum in spending on the mass of the population that is not productive of profits. In practice this means “labour market flexibility” – attacks on job protection, pensions, health and social security.

Europe’s capitalists thought they were to achieve this when Blair, Berlusconi and Aznar signed a joint declaration five years ago promising such reforms. Now all three are gone. Just two years ago chancellor Angela Merkel of Germany was toasted as the answer.

Now the followers of European capitalism have put their faith in Sarkozy. He wants to deal with the “scandal” of France having lower levels of poverty, inequality and working hours than Britain, let alone the US.

As Financial Times columnist and Sarkozy supporter Martin Wolf notes, “The French street has defeated the mighty French state time and again. History could well repeat itself.”